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Fires reignite debate over valued policies in Colorado

Heavy losses from recent wildfires are reviving a debate on "valued" insurance policies, an issue the Colorado legislature took up 113 years ago and will look at again next year.

The policies pay out a pre-determined amount in the event of a total loss on a property, versus more common "open" policies that calculate actual losses afterward.

Valued policies are the norm in 19 states, many of which implemented them in the early part of the past century. Colorado would have joined that camp, except for a gubernatorial veto back in 1899.

Such policies come at a cost: Premiums in states with valued policies only are nearly 4 percent higher on average than those in Colorado.

"Homeowners may pay more, but they will have peace of mind," said state Sen. John Kefalas, D-Fort Collins, who is working with a group of legislators on a bill for the next legislative session to add a valued policy option in Colorado.

Victims of Colorado wildfires are pushing for reforms, on grounds that their insurance settlements aren't making them whole and have proven much more difficult to obtain than expected.

"Your premiums are based on a total loss. You are paying for that amount," said Dale Snyder, a victim of the High Park fire. "If you have a total loss and you don't receive those (policy) limits, it is legalized theft."

Snyder, who estimates his settlement was $70,000 short, wants to see Colorado adopt a valued policy option on structures and household contents alike.

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More than two-thirds of High Park fire victims are finding themselves underinsured, he said, and homeowners would benefit if their policies offered a fixed payout in a total loss, not unlike how life insurance policies pay a set amount upon death.

"My inclination is that it would make sense to make sure that it is available to homeowners that live in the wildland-urban interface," Kefalas said.

Rather than converting Colorado to a valued policy state, his preference would be to offer valued policies as an option to existing open policies.

California offers a valued policy option, provided that the homeowner pays for the appraisal. And Louisiana, a valued policy state, offers a different twist, allowing insurers to opt out in some cases.

A valued policy option would be contained within a larger bill of insurance law changes Kefalas is working on with Rep. Claire Levy, D-Boulder, and Jeanne Nicholson, D-Black Hawk.

Insurers argue that adding a valued policy option in Colorado could raise premiums without resolving the issue of underinsurance.

The 19 states with valued policies have an average annual homeowner's insurance premiums of $926 a year, compared with $786 a year for those without. Premiums in Colorado averaged $893, and the U.S. average was $880.

It is worth noting that the valued policy states with the highest premiums — Texas, Florida, Louisiana and Mississippi — are all along the storm-prone Gulf Coast, which may help explain some of the disparity.

A 2011 paper from Peter Molk at Yale Law School concluded that property owners pay more than they otherwise would for valued policies, that insurers are less careful about quantifying risk, and that they can't cheaply plan for unexpected price increases in homes.

"Valued policy law wouldn't solve many of the problems that the fire victims are concerned about," argues Carole Walker, executive director at the Rocky Mountain Insurance Information Association.

Underinsurance often occurs because policyholders fail to update their agents on improvements to their properties, something that would still be an issue with valued policies, she said.

Another reason is that rebuilding costs more after a large-scale disaster, which could leave the amounts offered in a valued policy short, she added, not to mention general inflation that could leave policy limits inadequate over time.

Because they require an appraisal on the front-end rather than in the rarer instances when a claim is made, valued policies also come with higher upfront costs, she said.

Backers of valued policies argue they force both sides to agree on a value in advance, which is a better time than after a home has been destroyed. Insurers can't collect premiums on one amount and then turn around and pay a lesser amount to their customers.

"Consumers find out after the fact when an insurance company gives you a policy and slaps on the label of replacement cost, it is in truth not paying to replace that home," said Thomas Henderson, a lawyer with Burg Simpson, who has represented victims of the Four Mile Canyon fire.

Victims of a disaster are required to haggle at a time when they are least able to do so emotionally and mentally.

"The wisdom of valued policy historically is that if there is a total loss, you don't have to go through that exercise," said Henderson. "Nor are you required to go out and have to spend the money to replace the home."

Valued policy laws vary in what type of damage they will cover, and in many states cover structures only and not household contents. Kefalas said his legislation would provide coverage for both.

North Dakota's applies to any peril covered by the policy, while states like West Virginia, Texas and Missouri apply a value approach only to losses from fire. Georgia limits valued policies to residences.

The valued approach isn't a foreign concept in Colorado. Insurers are willing to appraise more expensive household contents such as jewelry, artwork and antiques in advance.

Opponents criticize valued policies for violating the principle of indemnification, or the idea that insurance should cover actual losses but not a penny more.

Overinsurance creates an economic incentive to commit fraud, although a more common outcome is a reduced incentive to control and reduce risks, critics argue.

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